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Not all bad news is harmful to a good reputation: evidence from the most visible companies in the US

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Abstract

This study investigates the relation between the disclosure of corporate social responsibility (CSR) bad news and reputation. In particular, our analysis focuses on the moderating effect that such disclosure may have on corporate reputation. A large and growing number of studies in the CSR accounting literature provides empirical evidence supporting the argument that CSR disclosure – which has been criticized for its self-laudatory style – may serve as a reputation management tool used to camouflage a company’s image among stakeholders, hence protect its reputation. These studies suggest that an optimistically biased reporting may enhance reputation. However, recent research in the financial accounting area shows that a non-or less-optimistically biased reporting may actually have positive effects on the credibility of the information disclosed. Therefore, the paper argues that the disclosure of CSR-related bad news could be beneficial and turn into better reputation. Based on data from a sample of the most visible companies in the US, this study shows that the disclosure of bad CSR news may have positive reputational outcomes.

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Notes

  1. Business Roundtable is an association of CEOs of major US companies. These CEOs lead companies with nearly 15 million employees and more than $7 trillion in annual revenues (https://www.businessroundtable.org/about-us). Business Roundtable member companies comprise nearly one-fifth of the total market capitalization. Established in 1972, Business Roundtable applies the expertise and experience of its CEO members to the major issues facing the nation.

  2. In the same line of reasoning, the crisis communication literature shows that early and transparent communication of negative incidents (a form of bad news) can help minimize losses of credibility (e.g., Ulmer and Sellnow, 2000, as quoted by Hahn and Lulfs, 2014, p. 405).

  3. Cho et al., (2012) examined whether differences in environmental performance and environmental disclosure are associated with environmental reputation. Disclosure is measured in terms of extent and content, not type of information (bad or good news).

  4. European Directive 2014/95/UE requires that, starting in fiscal year 2018, large companies publish reports on the policies they implement in relation to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, diversity on company boards (in terms of age, gender, and educational and professional background). More recently, in April 2021, the European Commission adopted another important initiative, which is the proposal for a Corporate Sustainability Reporting Directive. This regulation would amend the previous reporting requirements and extend to all large companies and to all companies listed on regulated markets more detailed reporting requirements according to mandatory EU sustainability reporting standards.

  5. For a discussion of the distinction between legitimacy and reputation see Deephouse & Carter (2005, p. 331), who suggest “two important criteria for distinguishing legitimacy and reputation: the nature of the assessment stated in the definition and the dimensions on which legitimacy and reputation can be assessed.” According to the first criterion—the nature of the assessment—legitimacy is centered on meeting and adhering to the expectations of a social system’s norms, values, rules, and meanings (Hirsch & Andrews, 1984; Parsons, 1960) […] but central to reputation is a comparison of organizations to determine their relative standing. For any two organizations, they will either have the same reputation or, more likely, one will have a better reputation than the other.” With regard to the second criterion, legitimacy assessments are usually “restricted to those involving regulative, normative or cognitive dimensions. In contrast, reputation may be assessed on these dimensions but can also be assessed on ‘virtually any attribute along which organizations may vary that can serve as a source of status comparisons’.” (pp. 331–332).

  6. We do not use the term “greenwashing” exensively and explicitly throughout the paper as it constitutes another word to call what we describe above – that is, there is a disconnect between what companies say (disclose; words) and what they do (perform; actions), and/or companies claim that they are undertaking pro-environmental initiatives—but they really are not. In other words, “greenwashing” falls under the umbrella of (legitimacy and) impression management, which we discuss here.

  7. Our measure here focuses on the information disclosed in tables and graphs and is not affected by how the information is presented (e.g., larger or smaller tables to deliver the same information). This is one of the strengths related to considering the information delivered in tables and graphs vs. the amount of space that they occupy (which changes according to the formatting style of the specific report).

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Acknowledgements

The authors wish to thank Den Patten and the participants of the the 5th French Congress on Social and Environmental Accounting Research for their valuable comments and feedback. Charles Cho acknowledges the financial support provided by the Erivan K. Haub Chair in Business & Sustainability at the Schulich School of Business.

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Appendices

Appendix A

List of firms

Table 11

Appendix B

The five disclosure categories and related themes

Table 12

Appendix C

Examples of coding

Table 13

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Cho, C.H., Fabrizi, M., Pilonato, S. et al. Not all bad news is harmful to a good reputation: evidence from the most visible companies in the US. J Manag Gov 28, 9–36 (2024). https://doi.org/10.1007/s10997-022-09645-6

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